What a difference a day makes! Well before the end of the day when Apple (AAPL) disappointed folks the sentiment in the market had done an entire about-face.
Was it just Wednesday when folks were still buying puts hand over fist with the put/call ratio for ETFs over 200%? It was. Turn the calendar to November on Thursday, 24 hours later and the total put/call ratio sunk to 85% (ETFs to 107%!). To put that in perspective it was the lowest reading for the total put/call ratio since October 2nd. Wow.
But the real eye opener was the equity put/call ratio which sunk to 51%. The last time that was this low was September 13 -- yes six weeks! -- when it was 50%. So yes, sentiment had its first major shift after a rally of nearly 140 points on the S&P. I'm a bit surprised it took that long.
There is good news and bad news in this. The bad news is that short term we probably need to shake out the newfound bulls. Okay, that's in keeping with my call from yesterday where I noted that a pullback should still lead to a renewed move up (remember the head and shoulders bottom I drew on the chart of the S&P?). The good news is that the low put/call ratio managed to finally push the 10-day moving average down. Typically when this moving average is heading down it is supportive of the market.
In other good news the positive breadth helped the McClellan Summation Index move up. Finally. Now there is a cushion. By that I mean that it would now require a net differential of -2,000 advancers minus decliners to turn the Summation Index back down so unless we have an all out rout to the downside (not my expectation) this indicator should be headed upward now.
The ratio of small caps to big caps, using IWM to SPY, continues to move up from the area it was supposed to. I doubt it will be a smooth ride but and I do realize that it did the same thing in October 2016 (red arrow on the chart) where it failed miserably. Yet I am of the mind that small caps should do well at this point in time.
I do not think the ratio will make its way to the top of the pattern (near .61) for a variety of reasons but the main one is that the 50- and 200-day moving average lines of the Russell 2000 are rolling over and are going to be resistance, but that's still 3-5% from here.
In any event, should we manage a pullback on Friday, it will be a good test to see if folks jump right back on the bear wagon, especially with a weekend ahead of us and the election early next week. I still think pullbacks would lead to another rally.
